The Non-Discussion About IFRS

Last week, I attended the AICPA’s annual “SEC & PCAOB Current Events Conference” - like hundreds of other CPAs needing their annual fix of information, gossip and camaraderie, though not necessarily in that order. I’ve been a steady attendee for a long time (since 1988), so I notice differences emerging from the conferences over the years. One difference this year: there was almost no discussion or mention of the possible convergence of IFRS standards and US GAAP. The idea seems to have been stillborn.

Last year, the idea of permitting companies to present IFRS financial statements as a non-GAAP disclosure had been floated, with possible rule-making expected to allow it. That rule-making never came about; the idea seemed to have lost its champion within the SEC’s walls. Aside from that, companies never seemed very warm to the idea, and it appears to have gone dormant.

“Dormant” doesn’t mean “dead.” Or maybe it does. We don’t know what the next iteration of the SEC is going to look like under the Trump administration, but it would surely be out of character if there was an emphasis on global unification of accounting standards. If anything, you’d expect IFRS convergence to be repudiated. So far, all other expectations have been turned upside down, however.

That’s not a wish for IFRS convergence to somehow resurface. My hope is that the new SEC takes note of the fact that we have a decent set of accounting standards here in the United States that works well for investors. According to Chief Accountant Wesley Bricker, we also have 525 foreign private issuers with a market cap of $7.3 trillion - and they file their financial statements on an IFRS basis.

That’s not an insignificant number of registrants, nor an insignificant chunk of market capitalization. Who can blame foreign private issuers for wanting to register their securities here? Capital goes where it’s best served, and there’s some real-world evidence that American markets provide capital with a good home.

There’s a glitch. The IASB/FASB convergence efforts floundered because there really was less in common between the two systems than appeared at first - even when the two boards worked together to formulate new standards. Distinct preferences emerged among investors, preparers and auditors in all parts of the world for what suits them best; the regulators seem to have recognized this and found that the best approach going forward is to simply stay in touch and keep aware of what’s going on with each other, to minimize forward differences.

Yet there are 525 registrants reporting on a different basis than investors are accustomed to using. How different? We can’t tell. The SEC, during the Cox administration, threw out the only tool that investors had for determining differences between IFRS and US GAAP: the annual reconciliation of earnings between the two bases. Without that reconciliation, investors have no way of equilibrating the two sets of earnings: it is simply not a do-it-yourself exercise. PricewaterhouseCoopers publishes an excellent reference manual detailing the similarities and differences between IFRS and US GAAP: it weighs in at 259 pages. KPMG has a more streamlined compendium: it’s only 124 pages.

Investors cannot just take the differences as outlined in manuals like these and make a few tweaks to IFRS numbers and get a GAAP result: differences in the two bases often go all the way down to the way information is captured and compiled at ground level within a company. Investors don’t have that kind of information, and are only able to make often-wild assumptions about what constitutes the differences.

The best solution: bring back the IFRS/GAAP reconciliation. It’s wishful thinking in a political reality where rules are expected to be trashed instead of created, but if we want our markets to continue providing a good home for capital, it would help investors - and maybe our domestic companies, too - if the financials of the foreign private issuers were put on a minimal even footing with our domestic companies. That was never too much to ask, even before the SEC deep-sixed the reconciliation.

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One topic rocked at the conference: the PCAOB’s surprise $8 million fine of Deloitte and the toppling of a dozen Brazilian partners for their complicity in a failed audit and in its aftermath, for their non-cooperation with PCAOB inspectors. Read Francine McKenna’s fine accounting of the affair at Dow Jones MarketWatch, or if you want more, check out the PCAOB’s version.